AT&T/T-Mobile merger: the Department of Justice’s dropped call

The Obama administration is suing to block the merger of AT&T and T-Mobile USA. Lawyers at the Department of Justice argue that the marriage of the second and fourth largest wireless carriers will reduce competition; they say this will in turn harm consumers by raising prices and slowing innovation.

But forget about the future of wireless competition for the moment. It is clear from the complaint filed by the government that the lawyers at DOJ do not fully understand the present state of wireless competition.

The lawyers at Justice note in their complaint that entry of new competitors into the wireless market is “difficult, time-consuming, and expensive.” And so it is. Wireless networks are capital intensive and high up-front costs make it risky to build and maintain a nation-wide network.

Justice lawyers claim that the higher prices they predict will result from the merger – and thus the potential for higher company profits–would not yield new competition. “Entry in response to a small but significant price increase for mobile wireless telecommunications services would not be likely,” Justice lawyers insist.

But hypothetical higher prices aren’t even required to attract new entrants. Nowhere in the complaint does the Obama administration acknowledge that entrepreneurs are already working and investing to get into the market. The most prominent of these new entrants is LightSquared, the telecom upstart backed by Phillip Falcone’s hedge fund Harbinger Capital.

Overlooking LightSquared is especially curious given elsewhere in the Obama administration – over at the FCC – LightSquared figures prominently in the Administration’s designs for the future of wireless.

LightSquared has a unique business model and ambitious plans to roll out a national wholesale wireless broadband network. Currently its efforts are on hold as it works with the FCC and the GPS industry to ensure there is no interference between its wireless network and the GPS network adjacent to LightSquared’s spectrum. But the efforts of LightSquared alone–and the staking of billions of dollars of investment capital by its investors–are enough to prove DOJ’s argument wrong.

“Justice lawyers claim that the higher prices they predict will result from the merger – and thus the potential for higher company profits–would not yield new competition.” – Nick Schulz

The Department of Justice also relies on the famous “Herfindahl-Hirschman Index” (HHI) to analyze the concentration of the wireless sector today and how concentrated it would be after the merger. An industry that’s too concentrated under HHI, it is assumed, will be harmful for consumers.

What DOJ lawyers fail to appreciate is that HHI can be a flawed tool for analyzing network industries such as wireless. According to HHI, the wireless industry is already troublingly concentrated, even before the merger.

But while the Index is saying one thing, the marketplace is clearly saying another. What matters is whether or not a high degree of concentration results in insufficient competition.

Uncompetitive industries are not typically characterized by high levels of investment or rapid innovation. After all, if a small handful of firms enjoy dominance, why fritter away funds on investment or new innovations?

So let’s look at what is happening with investment and innovation. Economist Michael Mandel of the Progressive Policy Institute notes that tens of billions of dollars of capital expenditure by telecom firms is one of the few bright spots in the economy.

(It’s interesting to note that the other big investors are Wal-Mart and energy majors. All three sectors – telecom, big-box retail, and big oil – are frequent targets of liberal political activists despite their considerable investments in infrastructure and jobs.)

So there’s lots of investment, but what about innovation? Against the backdrop of Steve Jobs’s retirement, it would be comical to suggest that wireless isn’t innovative these days. New products and platforms, new entrants, and new consumer products keep popping up every month. And it’s difficult to see how the merger would change that.

So what can the Obama administration do if it wants to help wireless broadband consumers? Demand for wireless services is growing rapidly as the wireless platforms mature and the offerings to consumers become more attractive and more data intensive. Freeing more spectrum so it can be repurposed for higher value uses would be a consumer friendly reform. Blocking this merger does nothing to advance that aim.

Nick Schulz is Editor-in-Chief of American.com and a DeWitt Wallace Fellow at AEI.